‘Invest in a house before you invest in stock’ | VailDaily.com
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‘Invest in a house before you invest in stock’

Richard Loth

The quote in that headline comes from Peter Lynch, the legendary Fidelity investment manager (Magellan Fund), in his 1989 best-selling book, “One Up on Wall Street.” Despite the passage of time, Lynch’s book is still on my recommended 10-best reading list for stock investors. I remember being impressed with his advice to would-be investors in stocks that they would do “better in houses than stocks.” It struck me at the time that this advice, coming from someone who had attained a super-human reputation investing in stocks, needed to be taken seriously.Lynch had several arguments, which are still relevant today, to support his position that “a house, after all, is the one good investment that almost everyone manages to make.” For starters, he thought that being a good investor in houses, as a residence as opposed to rental property was within the reach of the general public. Common sense tells us to buy into a good neighborhood, don’t buy the highest property on the block, use a reliable Realtor for advice, and hire experts to determine the structural/mechanical integrity of the property.Lynch thought that most people do better at buying homes to live in than investing in financial assets. “No wonder people make money in the real estate market and lose money in the stock market. They spend months choosing their houses and minutes choosing their stocks. In fact, they spend more time shopping for a good microwave oven than shopping for a good investment.”I’m going to take some editorial license with Lynch’s exposition on the “investment benefits” of buying a home in order to put these into the context of current tax considerations and real estate practices. First, the use of what I would call safe leverage, i.e., using a 20 percent down payment with a conventional 30-year mortgage, greatly enhances a buyer’s return on a property purchase. Let’s assume a very conservative average-annual capital appreciation of just 3.5 percent, which has been the historical average rate of inflation. These numbers translate into a 17.5 percent return on your down payment. In Lynch’s opinion that kind of return would put you in the Warren Buffet-category of stock market investors.Secondly, as we all know, this very favorable return is fortified by homeowners being able to deduct mortgage interest and property taxes on their federal tax return. Also, the long-term (living in the house at least two years) capital gain exclusion of $250,000 for individuals and $500,000 exclusion for couples on sale proceeds of your residence is not available in any stock investment.Lastly, considering the world we live in today, Lynch would consider a “house a perfect hedge against inflation and a great place to hide out during a recession, not to mention the roof over your head.”What Peter Lynch had to say about a house as an investment in the 1980s is still true today. However, the run-up in housing values needs to be looked at carefully by homeowners as they factor home equity into their overall retirement investment position.In this regard, an article by Amy Hoak in MarketWatch (July 17) raises some cautionary concerns: If you have amassed a large equity in your home, it would be a mistake to think you have to save less outside of this investment value. Yes, you can cash out someday by downsizing; however, the smaller home probably won’t be significantly less expensive than your current residence. Also, if you’ve tapped heavily into a home equity line or loan, you may be overly dependent on increasing property values to maintain the investment value of your home. A home is a great investment; however, it should be thought of as just one of the eggs in your retirement nest.The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Reach Loth at mentor@centurytel.net or 328-5591.Vail Daily, Vail, Colorado


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